Home Equity Loan vs. HELOC: Which is Right for You?

Whether you are planning a kitchen renovation once the ground thaws or you are looking to consolidate holiday bills, your home’s equity can be a powerful financial tool.

But when you start researching, you are often met with an alphabet soup of acronyms, specifically HE (Home Equity Loan) and HELOC (Home Equity Line of Credit). Both allow you to borrow against the value of your home, but they work in very different ways.

Breaking Down the Differences

Think of the difference between these two as the difference between buying a gift card and getting a credit card. One is a set amount you have all at once; the other is a limit you can borrow against as needed.

Here is a quick guide to help you decide which path fits your current needs:

1. The Home Equity Loan (HE)

Also known as a "second mortgage," this is a one-time transaction. You receive the money in a single lump sum.

• How it works: You get the full amount at closing and start paying it back immediately with fixed monthly payments.

• Interest Rate: Usually fixed. Your rate won't change even if the market does.

• Best For: Large, one-time expenses where you know the exact cost.

• Example: You have a contractor quote for a new roof or a solar panel installation, and you want a predictable monthly bill that won't fluctuate.

2. The Home Equity Line of Credit (HELOC)

This functions more like a credit card secured by your house. You are given a credit limit, and you can draw from it, pay it back, and draw again during a specific timeframe (the "draw period").

• How it works: You only pay interest on the money you actually use, not the full credit limit.

• Interest Rate: Usually variable. The rate can go up or down based on the Prime Rate.

• Best For: Ongoing projects, indeterminate costs, or financial safety nets.

• Example: You are doing a DIY basement remodel over several months and need to buy materials in stages, or you want an emergency fund for unexpected tuition or medical bills.

We Are Here to Help You Plan

Choosing between a fixed lump sum and a flexible line of credit comes down to your personal cash flow and your specific project goals. At Common Trust FCU, we want to make sure you feel confident in your decision before you sign a single paper.

If you are ready to put your home's equity to work this spring, stop by a branch or give us a call. We can look at the current rates together and figure out which option makes the most sense for your life and your budget. Stay warm out there!